What IRS Form 1045 Is For and When You’d Use It
Individuals, estates, and trusts use IRS Form 1045 (2020) to request a tentative tax refund by carrying back losses or unused credits from a prior year. This application for a tentative refund reduces taxable income by applying a net operating loss (NOL) or unused general business credits to prior taxable years. The form accelerates the refund process, making it a more efficient alternative to the standard amended return (Form 1040-X), which takes longer to process.
Taxpayers experiencing financial challenges may benefit from filing Form 1045, as it expedites the resolution of tax liabilities. It is essential to file within one year from the end of the taxable year in which the loss or credit occurs. Tax professionals can assist in determining the best course of action based on each taxpayer's unique situation.
When You’d Use IRS Form 1045 (2020)
IRS Form 1045 is used when taxpayers seek to apply a net operating loss (NOL) or unused general business credits to prior taxable years, enabling a faster tax refund. This form is particularly useful for those experiencing financial hardship, as it provides a quicker refund than the standard amended return (Form 1040-X).
Form 1045 can be used for NOL carrybacks, certain farming losses, or unused general business credits. It must be filed within one year from the end of the taxable year in which the loss or credit occurred. After this deadline, Form 1040-X may be required, which takes longer to process.
Tax professionals can assist in deciding if Form 1045 is the best option for applying carrybacks or losses to previous tax years.
Key Rules or Details for 2020
In 2020, the IRS made key changes to net operating losses (NOLs) due to the CARES Act. Most taxpayers with NOLs from 2018, 2019, or 2020 can carry back losses for up to five years, reducing taxable income from previous years. This change allows for a faster tax refund based on NOL carrybacks.
The CARES Act also removed the 80% limitation on NOL deductions, allowing taxpayers to offset 100% of taxable income in the carryback years. When filing, taxpayers must consider other tax attributes such as gross income, itemized deductions, and carryovers. These modifications present valuable tax planning opportunities, particularly for those facing financial hardship. By utilizing these rules, taxpayers can expedite refunds through NOL deductions.
Step-by-Step (High Level)
Filing IRS Form 1045 is a crucial step in securing a quick tax refund based on net operating loss (NOL) carrybacks or unused business credits. Follow these detailed steps to ensure accuracy and efficiency:
Step 1: Calculate your NOL
Start by calculating the NOL for the relevant tax year. Use Schedule A of Form 1045 to determine the NOL amount, considering your total tax liability and any eligible deductions or adjustments to income.
Step 2: Identify the carryback years
Next, identify the years to which you will apply your NOL. Most taxpayers can carry the NOL back for up to five years, allowing them to offset taxable income from previous years.
Step 3: Gather required documentation
Collect all required documentation, including your income tax return, relevant schedules, and any other supporting statements like casualty losses or non-business income.
Step 4: Complete Form 1045
Fill out Form 1045 with the NOL amount and ensure correct application of carryovers, considering tax attributes and modifications.
Step 5: Submit the form
Submit the completed form to the appropriate IRS service center and file it separately from your regular income tax return before the due date.
Following these steps facilitates a faster refund by applying NOL deductions to prior years' taxable income.
Common Mistakes and How to Avoid Them
When filing Form 1045, avoiding common mistakes ensures quicker processing and accurate refunds. Below are frequent errors taxpayers make and tips to prevent them.
Common Mistakes and How to Avoid Them
1. Incorrect Calculation of NOL
- How to Avoid It: Verify your NOL calculation using Schedule A and ensure all allowable deductions are included.
2. Missing Required Documentation
- How to Avoid It: Review the IRS checklist and attach all necessary schedules and forms before submitting your filing.
3. Filing With the Wrong Service Center
- How to Avoid It: Confirm the correct IRS service center address in the instructions to ensure your submission is mailed to the right location.
4. Applying NOL to the Wrong Years
- How to Avoid It: Apply the NOL only to the appropriate carryback years as specified by IRS guidelines.
5. Not Adjusting Taxable Income
- How to Avoid It: Recalculate your taxable income after applying NOL adjustments and carryovers to ensure accurate reporting.
Carefully avoiding these mistakes ensures the form is filed accurately and processed quickly.
What Happens After You File
After submitting your IRS Form 1045, the IRS processes the application for a tentative refund based on your NOL or unused general business credits. The IRS typically processes Form 1045 within 90 days, offering a quicker resolution than the standard amended return process. If the IRS identifies discrepancies or needs further information, they may send a notice requesting additional documentation, such as details on NOL carryovers or other tax attributes.
If your claim is disallowed, you may file an amended return (Form 1040-X) to appeal the decision. Once the review is complete, you will receive either confirmation of your refund or a revised tax liability. By filing Form 1045, you can expedite your refund and address tax liabilities more efficiently. This process facilitates a quicker resolution and can improve tax planning.
FAQs
What is the net operating loss (NOL), and how does it affect my taxes?
net operating loss (NOL) occurs when your deductions exceed your taxable income in a tax year. NOLs can be carried back to prior tax years, potentially reducing taxable income and resulting in a quick tax refund. This applies to individuals, estates, and trusts using Form 1045.
Can I use Form 1045 for a refund based on unused general business credits?
Yes, Form 1045 allows you to claim a tentative refund for unused general business credits, including credits for qualified small business stock. These credits can be carried back to prior taxable years, reducing tax liability and potentially speeding up your refund.
What happens if I miss the NOL carryback period?
If you miss the NOL carryback period, the NOL can be carried forward indefinitely to future years. The Tax Cuts and Jobs Act made changes to the NOL rules, allowing taxpayers to carry forward losses without a time limit.
Do I need to file Form 1045 separately from my income tax return?
Yes, Form 1045 must be filed separately from your income tax return. This form is for applying NOL deductions and other adjustments, and it is processed faster than a standard amended return.
How do alternative minimum tax (AMT) and other adjustments affect my Form 1045 filing?
When filing Form 1045, adjustments like the alternative minimum tax (AMT) or qualified business income can affect your refund. Be sure to account for these adjustments to ensure the correct NOL carryback and tax liability adjustment.
